This is the weekly newsletter from CapX. This week, it has delivered by Tim Montgomerie, who is producing a report for the Legatum Institute on the reform of capitalism. To receive the newsletter by email every Friday, along with a short daily email of our top five stories, please subscribe here.
Do you ever listen to “What The Papers Say” on Radio 4? If yes I want you to read these three headlines out loud in as outraged a voice as you can imagine:
1: “Gap between rich and poor becomes CHASM as average UK CEO salary soars to £5m”.
2: “FTSE 100 bosses’ pay rises to 183 times ordinary workers’ salaries”.
3: “Fat cats’ average salary soars to £5m”.
Those three headlines – from The Daily Express, London Evening Standard and Celebrity Café (where you can also read about how an “image of Princess Diana at Charlotte’s christening went viral”) – would seem to suggest that the problem of boardroom pay was getting worse. The reality is somewhat different. Adjusted for inflation the average pay of chief executives fell in the last year. Yes, “fell”. Jack Torrance at Management Today calculated that top pay is actually down by 4.9% (in real terms) since 2010.
None of us need to feel sorry for Britain’s “boss class”. The average pay of the chief executive officers of the FTSE 100 companies is still somewhere between £3.873 million per year (the median average) and £4.964 million (the mean average). The boom in CEO pay of the boom years has been far from unwound. The decline of the median average in the latest year captures the fact that most companies and most CEOs are, however, beginning to exercise some pay restraint. The rise in the mean average reflects the fact that some bosses are still accepting exceptionally large increases. Sir Martin Sorrell of the communications company WPP, for example, saw his total remuneration increase from just under £30 million in 2013 to nearly £43 million last year. That sum includes a £274,000 payment for Lady Sorrell to travel with him on overseas trips. It would take the average British worker 1,592 years to earn as much as Sir Martin. He earns (or perhaps I should write “receives”) twice as much as the second placed CEO. Take his increase out of the total and the overall numbers don’t look as bad as the anti-capitalist troublemakers would like to suggest.
CEO pay was in the news because of a report from the High Pay Centre. Run by the former business editor of The Guardian the HPC could have worked a little bit harder to communicate the true picture – the subtleties of CEO pay were hidden beneath its own provocative headline: “Executive pay continues to climb at expense of ordinary workers”. That headline is misleading in two ways. Most executive pay has moderated, as we’ve established. And there is no evidence that “shopfloor” workers are losing out when the “boardroom” gets more. Steadily – if a little slowly – more and more firms are embracing the living wage. Earnings are finally growing across the economy. Most big companies have welcomed George Osborne’s decision to introduce a National Living Wage of £9 per hour by 2020.
But I don’t want to end at this point – noting the High Pay Centre’s over-egging of its case. Even if there are some signs of progress CEO pay is still extraordinarily high. It’s not just me who thinks so. The Institute of Directors surveyed its members and found that more than half of them agreed that anger at executive pay was a threat to the status of business in society. Boris Johnson referred to the problem in a recent speech to the Centre for Social Justice. “How high,” he asked, “do they tower, these great corporate sequoias, over the tiny shrublets of humanity? How high do the gullivers of capitalism loom over the Lilliputians?” Answering his own question he noted that the ratio between top pay and average pay had quadrupled over the last forty years. Some will say that the fact that the pay of FTSE 100 CEOs is 183 times greater than average full-time earnings is simply a function of the free market but that’s too simplistic a response. In many European nations the ratio between average pay and boardroom pay is more like 100-to-1 and in some countries it is a lot lower than that. In America, in contrast, the ratio is twice as big with some measures putting it at 373 to 1. National cultures, tax systems and corporate governance regimes are clearly playing a part too.
The High Pay Centre has produced very useful reports on how the rewards given to CEOs bare little relationship to underlying performance. They have also questioned the argument that UK CEOs need to be paid more like American CEOs in order for them not to be poached. The HPC found that 80% of CEO appointments in the world’s largest 500 companies were internal promotions and only 0.8% of CEOs were poached from another CEO position in another country.
This is just one of the ways in which the CEO pay market does not resemble that for footballers’ pay (which is often mentioned in debates about telephone number salaries). As a Manchester United fan who watched Memphis Depay’s brilliant performance on Tuesday night I thought he was worth every pound of his reported £87,000 per week wages. The international transfer market in top footballers is a very real one. One other difference between football and executive pay is that Memphis Depay does not set Wayne Rooney’s pay and neither does Wayne Rooney set Memphis Depay’s. Directors’ pay is set by other directors, however, who have an interest in the merry-go-round continuing. It’s one of the reasons why Clare Foges – David Cameron’s former speechwriter and not necessarily a raging socialist therefore – has suggested that workers should sit on remuneration committees. She doesn’t want them to have veto power – but she does want to challenge the group think on committees where the current average salary is £450,000.
My preferred solution is a further strengthening of the corporate governance regime that the coalition government introduced in 2013 via the Enterprise and Regulatory Reform Act. Something is needed to ensure that the pressure that remuneration committees felt during the “shareholder spring” of 2012 is reignited. Requiring a super majority of shareholders (perhaps 66%) to approve CEO and director pay packages might be that something (although the legislation would need to include provisions to avoid abuse by a single minority shareholder). It would also be a neat companion reform to the government’s plans to guarantee proper turnouts in strike ballots.
If the public is to keep its faith in capitalism we need capitalists to behave well. And isn’t £3.9 million a year enough?
